5 Reasons Why We Believe Renren Is The Most Attractive Social Media Stock

Renren Inc. (RENN), often called the Facebook of China, is a Chinese operator of a social networking platform that enables users to communicate and share information via Renren.com. Its shares were among the top volume leaders to the upside on Tuesday, on an otherwise down day on Wall Street, including in Chinese equities as represented by the PowerShares Golden Dragon Halter USX China Portfolio (NYSEARCA:PGJ), both of which were down about 2% for the day.

The following are five good reasons why we like RENN here, and why we believe it is going higher:

1. Valuation: Like in the case of many of its peer social media stocks, analysts are projecting that RENN would generate losses, albeit modest, for FY 2012 and FY 2013. However, the stock is cheap on a P/B and PSR (price-to-sales ratio) basis compared to many in its peer group, especially when factoring in the projected revenue growth. Specifically, RENN trades at 1.8 P/B and 18.5 PSR, with analysts projecting 48.3% annual revenue growth over the next two years, with comparable numbers for its peers at:

Social games developer Zynga Inc. (ZNGA) trades at 5.0 P/B and 7.6 PSR, while analysts are projecting annual revenue growth at 20.3% over the next two years;

Online streaming music provider Pandora Music Inc. (P) trades at 14.4 P/B and 5.5 PSR, while analysts are projecting annual revenue growth at 48.5% over the next two years;

Groupon Inc. (GRPN), a provider of discount deals from local retailers trades at 12.7 P/B and 5.6 PSR, while analysts are projecting annual revenue growth at 35.9% over the next two years;

Online professional social networking platform operator LinkedIn Corp. (LNKD) trades at 16.1 P/B and 19.4 PSR, while analysts are projecting annual revenue growth at 56.4% over the next two years; and

Sina Corp. (SINA), a Chinese internet portal offering that is also a destination for the global Chinese communities, trades at 3.8 P/B and 8.4 PSR, while analysts are projecting annual revenue growth at 63.0% over the next two years.

2. Facebook IPO: The valuation argument becomes even more compelling when comparing RENN's market-cap at just over $2 billion to Facebook's (NASDAQ:FB) upcoming IPO at a suggested valuation in the $75-$100 billion range. Comparing RENN's revenues in the $120 million range to Facebook's $3.8 billion in annual revenue, and one can arrive at much higher valuations for RENN by putting a higher multiple on its revenue to account for the higher long-term growth potential in the Chinese market versus the relatively more saturated market for Facebook.

This would be similar to how Baidu Inc. (BIDU) as the Chinese Google trades at over 22x sales, while rival Google Inc. (GOOG) trades at just over 5x sales. At the very least, it is expected that the Facebook IPO will light a fire, at least initially, underneath all social media stocks. But given the similarity in business, it is likely that the impact may be more pronounced in the case of RENN.

3. Technical Basis: RENN shares have been consolidating in a tight range, generally between $5 and $6, for the last eight to ten weeks, consolidating gains from a sharp 60% spike at the end of January on news about the astronomical $75-$100 billion valuations being talked about for the upcoming IPO of Facebook. The move yesterday to the top of that trading range carries high conviction as it was accompanied by 3x average volume, and a breakout here could send shares sky-rocketing at least to the $7 range, and maybe as high as the low double digits in the intermediate-term.

4. Comprehensive Social Networking Platform: RENN is more than just a social networking site; it also has a video sharing website 56.com, a leading social commerce site Nuomi.com, and an online games center. It is expected that the company will see strong growth going forward in not just its social networking platform, but also in e-commerce, games, and mobile ad revenue.

5. Strong Cash Position: RENN has over a billion dollars, or almost $3 in cash, about half of the current share price.

Thus, overall based on RENN's compelling valuation and growth relative to its peers, its strong cash position, the excitement around the upcoming IPO of its peer Facebook, its comprehensive social networking platform, and the strong consolidation pattern from which it rose Tuesday, we expect that RENN will outperform going forward, at least relative to its social media peers.

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RENN over the next 72 hours.

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